Where did the risk premia go?

The major Swedish banks are issuing Additional Tier 1 (AT1) bonds at spreads around 100 basis points below their ten-year average. In May, a BB-rated property company’s hybrid bond was priced at a lower credit spread than the same company’s senior bond in the zero interest rate environment of 2021.

These examples highlight a defining feature of this credit cycle: the additional compensation investors receive for taking more risk is historically low, whether that risk comes from lower credit quality or a more junior position in the capital structure.

A decade of issuance

Our analysis covers the Nordic primary market from 2015 onwards. What stands out is the extent of spread compression: investors are receiving less additional compensation for taking more risk.

Issuance spreads for bank AT1 bonds are around 211 basis points, compared with a ten-year average of approximately 320 basis points. Investors are therefore accepting historically low credit spreads on the most subordinated bank debt.

Bank AT1 spreads at historically low levels

AT1 and T2 issuance spreads and annual means, basis points

AT1T2Annual means: solid linesAverage: AT1 320 · T2 170 bps

At the same time, the base rate accounts for a historically large share of returns. In our analysis, three-month Stibor contributes approximately half of the expected return, with the credit spread contributing the other half. This changes the relationship between return and risk: a higher overall coupon does not necessarily mean better compensation for credit risk itself.

The base rate accounts for more of the return

Coupon split between credit spread and three-month Stibor, basis points

Credit spread3M Stibor

A narrower gap between BB and BBB in the property sector

In the property sector, the spread premium for moving from investment grade to high yield is at its lowest over the period studied. The gap between BB and BBB is around 133 basis points. The gap between A− and BBB, by contrast, is around 41 basis points, close to its historical average.

A narrower BB–BBB gap in property bonds

Issuance spread differentials between credit ratings, basis points

BB–BBBBBB–A−

This comes at a time when property companies’ shares trade well below net asset value. The narrowing spread differential between stronger and weaker credits therefore warrants close examination.

Stendörren’s new hybrid bond illustrates the point. It was priced at Stibor plus 375 basis points, compared with Stibor plus 390 basis points for the company’s senior issue in 2021. The hybrid is more deeply subordinated and has equity-like features, yet its credit spread was lower than that of the earlier senior issue. Meanwhile, the company’s share price had fallen by around 40 % since the 2021 issue.

Property hybrid bonds versus senior debt

BB-rated property companies: hybrid issues and senior spread trend, basis points

Hybrid issueSenior spread trend

How we seek value

In this market, we see value in three areas: rigorous company analysis; relative value trades between issuers and across the capital structure when pricing diverges from historical relationships; and a fund structure that allows us to act when opportunities arise.

In May, we reduced our exposure to bank Tier 2 (T2) bonds and increased our holdings of senior corporate bonds with higher credit ratings, including A-rated EQT, alongside Thule and Sobi. We also added to several core holdings that continued to perform well following strong quarterly results.

The fund’s concentrated portfolio gives these decisions a meaningful impact on performance. This is how we pursue our target return of three-month Stibor plus 300 basis points, even when coupon income alone is insufficient.

Returns above the portfolio’s credit spread

Rolling twelve-month excess return over Stibor and credit spread, basis points

Excess return over StiborCredit spreadActive contribution

150200250300350400450MCF avg. +283 bps+271+212

Jul 2025Sep 2025Nov 2025Jan 2026Mar 2026May 2026

The fund’s performance in May

Mercurius Credit Fund returned +0.70 % in May, taking its year-to-date return to +2.08 % and its trailing twelve-month return to +4.74 %. Volatility since inception stands at 1.42 %.

Please contact me or Andreas Olsson if you would like to receive the monthly report, available in Swedish, or discuss our approach to the credit market.